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Vancouver’s tax system scares off potential businesses

Opinion: From 1999 to last year, the net number of new businesses licensed in the city was just 46

Roslyn Kunin, business economist and speaker.

Vancouver may be the most livable city in the world, but it is not the easiest in which to make a living. Having enough jobs is right up there with the high cost of housing as among its major challenges.

The usual solution favoured by politicians for generating jobs (and the taxes and prosperity that came with them) is to attract new employers.

Attracting new businesses is hard and it is a task at which the City of Vancouver is failing. From 1999 to last year, the net number of new businesses licensed in Vancouver was 46 — less than four new businesses a year. In this same time period, the city’s population grew by over 80,000.

One reason why Vancouver is doing so dismally on the business front is the tax system. Municipalities rely very heavily on property taxes for their revenue. Both business and residential properties are taxed, but residents vote. So the temptation is to tilt the tax burden away from residences toward business.

Most accept that businesses should be paying a higher rate of tax than residents. The trick is finding the right rate. Too high and you reduce the actual or potential number of businesses in the tax base. The City of Vancouver is limited by the requirement that the amount of total property taxes paid by businesses be about 4.5 times the amount paid by residents. This is an improvement for business as the ratio used to be six times. However, the ratio for B.C. as a whole is 2.7, while in the non-Vancouver part of the Metro area, where our closest competitors for businesses are, it is 3.9.

Any fixed revenue ratio tacitly assumes that the number of businesses will be growing at roughly the same rate as the number of residences. This is not the case in Vancouver. Between 2003 and 2008, the increase alone in the assessed value of residential property was greater than the total existing value of all non-residential property. Thus, the business share of property tax becomes a heavier and heavier burden for the relatively smaller number of businesses. Property taxes on individual businesses have increased by as much as 34 per cent in one year. And it is the business owner who pays these taxes, even in rented premises. They are passed on either directly or in the rent. Let us remember that most businesses are not fat cats, but skinny puppies. Over 90 per cent of all employers have fewer than 20 workers and most are in a constant struggle to meet that payroll.

Making the problem even worse for anyone trying to run a business and meet a payroll is taxing business premises for their highest and best use. The land under a one-storey retail building that has stood for decades can be taxed as though it contained a 17-storey highrise if a change in zoning now allows for the bigger structure. In the long run, that makes sense and allows the city and the tax department to get the maximum value from the scarce resource that is our land.

However, as John Maynard Keynes, the economist, once said: In the long run we are all dead. In the short- to medium-run, where we live, that 17-storey building may make no sense at all. Capital funds, workers and materials may not be readily available to construct it. Previously constructed similar buildings might be standing empty. Political and other uncertainties here and abroad may be dampening developers’ enthusiasm. In cases like these, all that taxing at the higher rate does is to discourage or eliminate existing business.

Businesses always have options to deal with higher taxes. They can move to a lower tax jurisdiction. They can downsize to a home office or even to a car with a tablet. In the extreme, they can shut down. All of these measures mean fewer jobs and less tax revenue.

In response, the City of Vancouver must continue on its path to make sure its business tax regime is competitive and fair. Any tax shift toward residences would be very small since it would be shared among a large and growing number of residences.

More taxes on business are not a solution for politicians or voters. Rather, they reduce growth as well as the number of jobs. Let us use our tax system not only to keep Vancouver livable, but also to be a place where we can earn a living.

Business columnist Roslyn Kunin is a consulting economist and speaker and can be reached atwww.rkunin.com.

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